How credit card churning can backfire


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Credit card churning can become a clever idea gone wrong.

Key points

  • Credit card churning is legal, although credit card companies consider it a game of the system.
  • Without planning and discipline, it’s possible to get in over your head and hurt your credit score.

Opening a credit card can be quite lucrative. For example, you could earn airline points or cash back. Your card can come with a concierge to help you plan your trip or buy tickets to see your favorite band play. And the attractive nature of many credit cards leads to credit card churning. Here, we’ll see what credit card churning is, how it started, and how badly it can backfire on you.

What is credit card churning?

Credit card churning happens when you repeatedly open and close credit cards to earn whatever reward that card is offering right now. If you have excellent credit, you may find it dangerously easy to open as many cards as you want.

How the Credit Card Churning Started

Once credit card companies started offering bonuses to those who opened a card with them, people took advantage of the situation. They would open a card, use it long enough to claim their reward, then close the card or stop using it. As the rewards piled up, they told others about the practice, and it spread. Soon credit card churning was seen as a savvy way to get something for nothing.

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Credit card companies have noticed the trend

To be clear, there is nothing illegal about credit card churning. However, the credit card companies see it as a game of the system, and many have put hurdles in place to slow (or stop) the practice.

Just last week, I noticed an article revealing “the best credit cards to churn.” It might as well have a title that says “Credit Card Companies About to put in place protections against churning.”

Until then, if you decide to employ the credit card churning strategy, do so at your own risk.

Here are a few ways credit card churning can cost you more than it’s worth.

Credit card companies are smart

Card issuers know churning all too well. They are also increasingly sophisticated in spotting churners. Be aware that credit card issuers have the legal right to close your account without warning.

Let’s say you go on vacation and your credit card is declined when you check out of your hotel. You didn’t know it was canceled by the credit card company. Unless you have another way to pay for the room, you might be in hot water.

But there are more problems associated with a canceled credit card than inconvenience or embarrassment.

“Usage” is worth 30% of your FICO® score. Here’s how it works:

  • In this scenario, you have three credit cards open, each with a spending limit of $5,000. This gives you $15,000 of available credit.
  • Between the three cards, you owe a total of $5,000, so you’re using 33% of the available credit ($5,000 ÷ $15,000 = 0.33).
  • Your credit card company recognizes a churning pattern and cancels your card. Now you only have a total credit of $10,000 available. Suddenly owing $5,000 means you’re using 50% of your available credit.
  • As the amount of available credit you use increases, your overall credit score suffers.

It’s not a matter of “finder keepers”

Before picking up a new card, it’s worth reading the fine print. The contract may give the company the right to take back the rewards, especially if they think you’re trying to game the system.

Excessive application also impacts your FICO® score.

“New Credit” is 10% of your score. Asking for one card after another lowers that part of your FICO® score.

Annual fees are no joke

The best credit card rewards tend to come with cards that have an annual fee. Whether you use a card or not, you will be charged this fee each year the card is opened.

You risk going into debt

None of us know what’s around the corner. It could be illness or job loss. It could be another global pandemic. Even if you pull out a card with no intention of carrying a balance, you could find yourself in a financial corner and having to buy essentials on credit.

Another way to risk going overboard is to create a card that requires you to spend a significant amount of money before the rewards kick in. a few months after opening an account. Unless you are disciplined to pay it back in full, you will end up with debt.

There’s no reason to get a rewards card unless the rewards you receive are worth more than the interest you pay.

There’s nothing inherently wrong with a rewards credit card. Problems arise when you take on more debt than you can handle and forget to consider the impact of new cards on your credit score.

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